What's next for health care reform and the market?

Key Points

Health care policy has been a top priority for Congress, but legislative reform has stalled

Individuals and insurers participating in the insurance exchange marketplace are facing uncertainty

Health care stocks have performed well and remain attractive, despite policy gridlock

The much anticipated effort by a Republican Congress and President Trump to repeal and replace the Affordable Care Act (ACA or “Obamacare”) came to a crashing halt in late July. Senate Majority Leader Mitch McConnell acknowledged the failure, saying “it’s time to move on.” This followed seven years of avowed opposition and numerous votes in the House to do just that.

The Senate went through a series of votes on different versions of their own reform package. Ultimately, Senator John McCain joined two fellow Republican senators in voting “no” on a limited approach that would have eliminated certain elements of the Affordable Care Act, including the requirements that individuals purchase coverage along with minimum insurance coverage mandates.

Too many headwinds

The failure to find common ground revealed once again divisions within the Republican party. Some members felt that none of the proposals went far enough to unwind Obamacare, while others felt it went too far and would leave too many without health care coverage.

The insurance industry was concerned that it would be forced to focus on coverage for a sicker, unprofitable pool of enrollees while younger, healthier individuals could opt out of insurance entirely.

State governments were worried about budget gaps from cutbacks to the expansion of Medicaid. And polls showed voters were generally in favor of retaining Obamacare, making the issue particularly perilous for Republican members of congress up for reelection in 2018.

The president has urged the senate to continue focusing on reforming health care, and indeed, there’s been talk of new approaches seeking to find a path to legislative success. But it is not clear that the Republican leadership intends to move forward unilaterally. Both Senators McConnell and McCain have suggested it is time to elicit ideas from Democratic senators. And Senate Minority Leader Chuck Schumer, acknowledging that Obamacare needs improvement, signaled his willingness to work with senate Republicans.

An uncertain future for health care policy

Time is running short. Insurers had to submit rate plans by mid-August and will finalize their 2018 exchange plans roughly by the end of September. They are anxious for greater clarity, especially regarding the subsidies they receive under the existing law. President Trump threatened to stop those subsidies if no new bill is passed. That uncertainty could result in fewer insurance choices for individuals who seek coverage through insurance exchanges provided through the ACA.

Of the almost 3,200 counties in the U.S., it is estimated that nearly 50% will be offered coverage from only one insurance carrier.1

Health care reform could be on the back burner

The focus on health care reform has preoccupied Congress for the first seven months of the new administration, with little to show for it. With Congress back to work after its August recess, the federal budget and debt ceiling will need to be addressed before the focus shifts to the administration’s next priority -- tax reform. While meaningful health care reform could still happen, it is becoming increasingly unlikely.

Should the ACA stand, there is general acknowledgement that the individual insurance exchange marketplace needs to be stabilized. Insurers need to be incentivized to participate. This likely requires healthy individuals to purchase coverage to help insurers cover their risks. There is much disagreement on how best to accomplish these reforms, but this is likely to be the next focus of debate.

Health care stocks have profited

Throughout this debate, the health care sector of the S&P 500, representing a sizeable 14.3% of the index, has been one of the better performing groups with year-to-date gains of 19% as of the end of August. That easily outpaced the 12% return of the broad S&P 500 for the same timeframe.

Second quarter earnings have been favorable, especially for pharmaceutical and biotech companies. A potential negative factor is that the failure of the health care reform effort means no tax relief for medical device companies, at least for now.

As is true for the overall market, valuations for the health care sector are expensive relative to their longer-term historical averages. Nevertheless, the fundamental backdrop for equities in general, and health care in particular, remains favorable in our view. The Ameriprise Global Asset Allocation Committee currently recommends an overweight position in health care. This remains an area of opportunity for long-term investors, even as Washington struggles to agree on longer-term solutions regarding health care coverage.

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1 Source: The Center For Medicare and Medicaid Services, dated September 6, 2017

Past performance is not a guarantee of future results.

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